The top 10 rules of wealth-building, can appear to be out of the comfort zone for the vast majority.
However by creating a plan and taking some simple steps, anybody can achieve riches or wealth.
So let’s look at the framework and steps you need to take in order to achieve wealth or financial freedom.
It requires discipline, focus and buying assets that work for you not against you. Plus the power of compounding and time.
So let’s see what steps we need to take and implement !
1. Spend less than you earn
Ideally you should live below your means. So that any surplus cash is regularly set aside to save and invest rather than being eroded by the rate of inflation.
The vast majority of people in the UK hold cash in badly paying accounts, or accounts not paying any interest at all. So effectively that sum of money is losing value as it is failing to keep up with inflation.
In recent years, we have been bombarded by the the term “cost of living crisis” in that people are living pay check to pay check.
But look around, your workplace or local supermarket. There are lots of new cars being driven around.
Supermarkets trolleys are stacked full, thinking there is a food shortage coming.
Plus every time you go on holiday, the planes are alway full.
So their money being spent, but on the wrong things.
So create a simple budget, over say 3 months and you will be surprised at where your money is going and what it is being wasted upon.
Could you reduce any non essentials to improve your financial position.
Think about the 50/30/20 rule in that 50% is on home / food / bills etc. 30% is wants so days out, socialising etc, and 20% is for debt or savings.
See blog post for further info: https://moneyminted.co.uk/what-is-the-50-30-20-rule
Finally, avoid lifestyle creep, as you pay increase so does your outgoings.
In that you are in a forever cycle of spending according to your income. So your financial position never improves.
2. Pay yourself 1st and automate
Learn to pay yourself 1st ideally on each payday.
I personally set funds aside on the 1st of each month by standing order.
It’s a simple habit to set-up and after a while you don’t seem to miss that money.
But most people do it the wrong way round, they save any money left at the end of the month.
But surprisingly they have no money left. They could be struggling to survive until the next payday.
So they end up saving no money at all.
So may a conscious decision to set aside some money. You may start off small say £ 50 or £ 100 per month.
As your confidence grows and you adjust your outgoings it will seem like 2nd nature to you.
Once automated into your savings accounts you can just set and forget.
You’ll be amazed at how small things can make a difference when starting.
3. Build an emergency fund
When starting out, your 1st port of call should be to create an emergency fund.
Held within a separate instant access account, that can only be used for emergencies.
Not treats or everyday spending.
This could cover car breakdown, MOT or annual insurance. Home repairs such as boiler service or repair and other breakdowns.
Imaging how stress free your life would be if you could get such funds immediately. Without the need to obtain bank loan at excessive interest rates, or adding to existing credit card balance at silly interest rates.
Experts believe it should be between 3 to 6 months of expenses. But this sum it out the reach for most.
So set aside an easy target say £ 500 or £ 1000. So it can be achievable.
I personally like to have £ 1,000 set aside as emergency fund. BuT I could use a credit card if I wish, But make sure that you then pay if off IN FULL to avoid any interest charges or fees.
4. Maximise tax free ISA
If you are going to set aside some money. Make sure that you invest it within a stocks & shares ISA or Cash ISA.
You are allowed to £ 20,000 each tax into this type of product across numerous types.
Whereby all gains are tax-free, and and dividends received are income. tax free. Plus any gains made are free from capital gains tax.
It simplifies your admin, as you don’t have to declare any details to HMRC through annual self-assessment.
You can set-up a simple stocks and shares ISA in a matter of minutes through a number of clans on website or APP.
If you do want to create wealth, remember that investing in stocks and funds, will produce much grater returns that cash over the medium and long term.
The market returns around 8% each year. Although in recent years we have received better returns through the big increase and gains in tech stocks.
But most people have never been taught hold to buy shares in a company or fund / ETF. So it’s outside their comfort zone. But it’s a relatively straightforward process. If you do some due diligence, background research.
Check out my blog post about how investing should be simple: https://moneyminted.co.uk/the-world-of-investing-should-be-simple-and-easy
You may not use up all your ISA annual allowance, but it cannot be carried forward. So if you don’t use it – you lose it.
5. Focus on time in the market
Try not to time the market, even the so called professionals won’t get that right.
So learn to invest on a regular basis. Say the start of each month.
Some providers offer regular investing day. So if you invest on that particular day they offer rescued fees as you invest as a collective.
Remember that time in the market will always beat trying to time the market.
Stocks and indices will go up and down on a daily basis.
It will be all over the news when markets fall dramatically in a one day. But they won’t tell about it recovering and getting better over the coming months.
You will have good days and bad days, in that your portfolio will show a profit or possibly a loss.
But over the course of time you will be rewarded handsomely for avoiding short term market noise.
I personally see it as a buying opportunity when the stock markets falls.
But it’s how you react to the market prices. If you can just switch off, it will pay great dividends and benefits in future years.
6. Learn to diversify
When starting out, you may find the idea of investing confusing and complex.
Initial questions may be how too get started and what to buy.
It may be that you buy a simple global tracker and ETF which covers the whole world.
Later on you may choose specific ares or sectors. Such as FTSE 100 (UK), S&P 500 (USA).
Or you may buy into specific companies such as banking stocks, retailers, Oil companies and household names that you know.
So make it a decsion that you learn to diversify and don’t hold all your assets in the same sector, country.
How would you react if that stock fell dramatically or the UK suffered a recession and gave you poor performance over the next few years.
You won’t get very decision right, but if you choose a smoke globe fund with a few hundred stocks.
You can reduce any eliminate your risk potential.
Most passive funds or ETF’s will have greatly reduced charges compared to active manage funds. Plus they have outperformed the vast majority of them in recent years.
I personally hold funds offered by my platform provider based upon my attitude to risk. So it could be cautious, moderate, adventurous etc.
They will also offer a selection of funds the recommend which has proven track records.
So they idea of getting invested and buying funds should be relatively simple.
If you do some basic research and follow some simple steps.
7. Invest in a pension
In the UK the personal or workplace pension is considered one of the most tax-efficient investment products available.
You are probably already contributing to a workplace Defined Contribution (DC) pension already through the introduction of Auto-enrolment in 2012.
At present, you are normally automatically enrolled and you contribute a minimum of 4%, your employer will add 3% and the government will top it up by 1% with tax relief (so 8% minimum) Although some employers offer attractive rates to attract staff.
But you are normally limited to the amount of contributions you can make each month through payroll.
Plus your funds are usually placed in default or lifestyle funds on your behalf based on your date of birth and selected retirement date.
Most people see a figure each statement that goes up and down. But they are probably unaware how that fund is performing. Or if it is making money or using money.
If you want to increase contributions you have an annual allowance of £ 60K per annum or lower salary amount.
Plus you are able to contribute to age 75 and get free money from your employer.
Another option may be to do its yourself such as a personal pension or self-invested pension plan (SIPP).
Whereby you can decide your own contributions and pick your own funds and investments.
You can actually pay into numerous pensions each year such to your annual allowance.
But are you happy and comfortable picking your own funds and investments.
However though, having a private pension as well as a workplace pension. Could prove to be a great and valuable way to build wealth much quicker in tax free wrapper. As all profits and gains remain tax free within the pension wrapper.
See blog most about contributing to numerous pensions: https://moneyminted.co.uk/how-many-pensions-can-i-make-payments-into
Be aware:
The minimum age you can access a pension is currently age 55 (unless you have serious ill-health or protected age. But this will soon rise to age 57 with effect from 6th April 2028.
So if you do contribute into a pension, it may be stuck in that account for many years.
8. Consider fees and charges
When making investments in specific products, Give some consideration to the fees and charges payable.
One the course of time, they could have a detrimental effect of your pot portfolio value.
So you should ideally choose low cost trackers and ETF’s.
Or if you are going to buy a specific share of fund, set a minimum limit on what you buy say £ 100 to make it worthwhile.
If you are going to re-invest any dividends in that company make it worthwhile. You may pay a small fee to cover dividend re-investment, but it wont be worth while if the mint received is only a few pounds.
Also avoid excessive trading, a search time you buy and sell stock or fund. You will incur charges.
I personally make it a point to buy and hold. So don’t tend to sell shares until absolutely vital.
Also consider annual management charges by your platform provider to look after your investments. It is usually capped to a % value, based upon the size of your portfolio.
The information about fees and charges should be readily made available online or in a quarterly or annual statement.
If you have a portfolio over many years think how excessive fees and charges Amy affect your portfolio moving forwards.
If you are in workplace pension, it is normally capped. But doing it yourself could have higher fees.
Especially if you have an old pension from the 1980’s or 90’s with guarantees attached to it, or w/profits funds.
Or if do use a financial adviser, those products will incur higher fees. As you are paying the adviser and his network.
I personally believe you should do it yourself and nobody should care more about your money than you.
9. Avoid bad / expensive debt
Pay off expensive consumer debt (credit cards, high-rate overdrafts, or personal loans) as a top priority.
Learn to distinguish between “bad debt” (high-interest consumer spending) and strategic “good debt”
Good debt could be a rate below 5% to cover long term asset should as a mortgage. With the house increasing in value as it is held for many years.
Bad debt is credit cards, bank loans, PCP payments normally at much higher rates. For assets that normally decrease in value.
So it’s a double whammy, not only are you debt to buy something. But it is losing money so remember try and limit your liabilities.
Try and build assets that appreciate in value creating wealth growth.
See blog post about clearing high debt: https://moneyminted.co.uk/the-fastest-way-to-pay-off-debt
10. Get your admin in order
Do you know where all your accounts and investment are held.
What about old workplace and private pensions. Do you have statements or log-in details.
Do you have any missing pensions ?
If so you can use the Pension Tracing service http://www.gov.uk/find-pension-contact-details it’s free to use.
Or the new pension dashboard about to be introduced through http://www.moneyhelper.org.uk
Do you have adequate insurance in place such as income protection, life insurance to shield your family from
financial ruin it disaster strikes.
It could prove invaluable if you have outstanding mortgage balance, non-earning spouse, or young children.
Term assurance is relatively cheap to set-up.
You buy it for security in the hope that it doesn’t pay out.
Have you written a legal will recently and has it been witnessed, or does it need updating, it circumstances have recently changed.
What about setting up a Lasting Power of Attorney (LPA) to ensure your accumulated
wealth passes down efficiently through inheritance and estate planning.
With regard to your pension have you completed simple nomination forms or expression of wishes with the respective pension provider.
So they can find family members if something happens to you.
What about creating as simple death list or file. Which lists all the assets / liabilities you hold. That can be found in 1 place to simplify your finances if something happens to you.
So make a conscious decision to get your admin in order.
Do you then review it on an annual basis.
Remember:
If you found this blog post useful and informative. Check out my other posts on savings investing, pensions and investment books I recommend on https://moneyminted.co.uk
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